Taxing Risky Investment

Michael Devereux

No 4053, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper re-examines the impact of capital income taxes on the incentive to invest in the presence of risk. Specifically, it challenges a well-known claim in the literature that such a tax can leave incentives ?basically unaffected? because the tax liability is offset by a reduction in the post-tax risk of the investment. The Paper argues that this claim is based on a misinterpretation of the cost of capital, and that in general the cost of capital is not helpful in assessing investment incentives in the presence of risk. Instead it proposes an alternative measure, based on the market value of the pre-tax stochastic cash flows. This measure indicates that the disincentive effect of capital income taxes can be substantial.

Keywords: Capital income tax; investment (search for similar items in EconPapers)
JEL-codes: E22 H25 H32 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-ent, nep-pbe and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP4053 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Taxing Risky Investment (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4053

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4053

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().